Published August 8, 2025
Our friends at Delta Research posted an amazing chart this week showing that huge AI spending by companies has contributed more to economic growth this quarter than falling consumer spending. We wouldn’t expect that to be sustainable. The question is whether consumer spending rebounds or not. Here’s what Delta sees:
“Tariff implementation, weaker-than-expected manufacturing and services data and a disappointing non-farm payrolls report last Friday would normally weigh on the stock market. These market-moving data points imply slowing economic growth and a deteriorating labor market. From the low of last Friday, when the employment data was released, the S&P 500 is up 2%.
Part of the rebound in the market comes from high confidence that the Federal Reserve will cut the Fed Funds rate at the September meeting in response to the weak economic data. The Fed Funds futures market is currently pricing in a 91% probability of a 0.25% rate cut – before last week’s weak jobs report, the futures market probability was 38%
The AI technology implementation is creating a huge amount of GDP growth. So far this year, AI capital expenditures, defined as information processing equipment plus software, has added more to GDP growth than consumers’ spending.
Over time, stock prices follow earnings. Q2 earnings have been materially better than expected. Revenue growth so far has been 6.0%, earnings growth is 10.3%, and margins are exceeding 12%. This compares to expectations of approximately 4.0% top-line growth, 4.9% bottom-line growth, with margins around 12%. The Magnificent 7 reported earnings growth of 25.7% vs. 13.9% expected.
Stock valuations are the result of an equilibrium being discovered between buyers and sellers. High demand for stocks generally lifts valuations, all else being equal. Bloomberg reports that buybacks reached $166B in July versus the previous July record of $88bn. After $600B in buybacks in the first half of the year, the market should easily exceed $1 trillion in buybacks versus the previous record of $943B set in 2024.
In addition to companies buying their own stock back at a record pace, hedge funds became net buyers in May, purchasing a net positive $114 billion worth of stock.
Retail investors have also stepped up their stock purchases. The chart below shows that monthly net inflows into U.S. equity ETFs jumped higher in July.
Between now and the end of the year, we will learn what the ultimate effects of higher tariffs, slowing manufacturing and services activity and a weakening job market will be on the trajectory of the stock market. The Atlanta Fed’s GDPNow model is forecasting third-quarter GDP growth to be 2.5%, well above the Street’s consensus estimate of less than 1%. Without a recession, the stock market usually appreciates over time.
Market Update
Coming off the stock market’s worst week in months, investors were focused on whether the market dip would find buyers or not. Monday’s answer was a resounding ‘yes’. The S&P rose +1.5% led by strength in tech stocks. -0.5% was given back Tuesday with market darling Palantir posting blowout earnings after the bell. Wednesday brought an announcement from Apple that moved the market. The iPhone maker announced plans to invest heavily in U.S. manufacturing in a bid to improve relations with the Trump Administration. Investors cheered the news sending the stock sharply higher. The heavily-weighted stock pushed up the S&P 500 by +0.8%. The company’s stock rallied further Thursday and Friday helping market averages overcome mixed economic data and weak earnings from global construction company Caterpillar. The S&P closed Thursday flat. Apple helped push the Nasdaq higher by +0.9% Friday to a record close. Apple’s stock shot higher by +13% for the week.
The harsh selloff from last week’s monthly jobs report surprise saw little carryover into this week. Stocks essentially recouped the selloff with the S&P 500 rebounding +2.49%. The Nasdaq 100 (QQQ) touched a new closing high with a +3.73% gain, almost a full 1% of that move due to Apple shares. Small cap stocks continue to substantially underperform posting a +2.51% rise but recovering only about half of their drawdown from the prior week.
Warm wishes and until next week.